Business Inflation Expectations Survey (BIES) – February 2022

April 6, 2022: The Business Inflation Expectations Survey (BIES) provides ways to examine the amount of slack in the economy by polling a panel of business leaders about their inflation expectations in the short and medium-term. This monthly survey asks questions about year-ahead cost expectations and the factors influencing price changes, such as profit, sales levels, etc. The survey is unique in that it goes straight to businesses – the price setters – rather than to consumers or households, to understand their expectations of the price level changes. One major advantage of BIES is that one can get a probabilistic assessment of inflation expectations and thus get a measure of uncertainty. It also provides an indirect assessment of overall demand condition of the economy. Results of this Survey are, therefore, useful in understanding the inflation expectations of businesses and complement other macro data required for policy making. With this objective, the BIES was introduced at IIMA from May 2017. The questionnaire of BIES is finalized based on the detailed feedback received from the industry, academicians and policy makers. A copy of the questionnaire is annexed.

Companies are selected primarily from the manufacturing sector. The “BIES – February 2022” is the 58th round of the Survey. These results are based on the responses of around 1000 companies.

  1. Inflation expectations
  • One year ahead business inflation expectations in February 2022, as estimated from the mean of individual probability distribution of unit cost increase, have further increased by 15 basis points to 6.09% from 5.94% reported in January 2022. The trajectory of one year ahead business inflation expectations is presented in Chart 1.
  • The uncertainty of business inflation expectations in February 2022, as captured by the square root of the average variance of the individual probability distribution of unit cost increase, has remained around 2.1%, same as reported in January 2022.

Chart 1: One year ahead business inflation expectations (%) 

  • Respondents were also asked to project one year ahead CPI headline inflation through an additional question using a probability distribution. This question is repeated every alternate month, coinciding with the month of RBI’s bi-monthly monetary policy announcement.
  • The businesses in February 2022 expect one year ahead CPI headline inflation to be 5.74%, sharply up from 4.96% reported in December 2021, with a relatively low standard deviation of 0.92% (Chart 2).

Chart 2: Expected CPI headline inflation (%) – one year ahead 

  1. Costs
  • The cost perceptions data indicates further hardening of cost pressures.  Around 70% of the firms in this round of the survey perceive significant (over 6%) cost increase, as against 62% reported in the earlier round (Chart 3).
  • Over 39% of the firms perceive that costs have increased very significantly (over 10%), as compared to 36% reported in the earlier round. For the first time, around 2/5th of the firms reported more than 10% cost increase.

Chart 3: How do current costs per unit compare with this time last year? – % responses 

  1. Sales Levels
  • Firms’ sales expectations in February 2022 remained subdued. Percentage of firms reporting ‘much less than normal’ sales stayed around 36-37% for the last three rounds.
  • Over 59% of the firms in February 2022 report that sales are ‘much or somewhat less than normal’ (Chart 4)[1].

Chart 4: Sales Levels – % response 

  1. Profit Margins
  • Over 52% of the firms in the sample report ‘much less than normal’ profit – marginally down 54% reported in January 2022 (Chart 5).
  • High cost increase along with muted sales has severely affected the profit margin expectations of firms.

Chart 5: Profit Margins – % response

Business Inflation Expectation Survey (BIES) – Questionnaire

A. Current Business Conditions

 

Q1. How do your current PROFIT MARGINS@ compare with “normal”* times?

o   Much less than normal

o   Somewhat less than normal

o   About normal

o   Somewhat greater than normal

o   Much greater than normal

 

Q2. How do your current sales levels compare with SALES LEVELS@ during what you consider to be “normal”* times?

o   Much less than normal

o   Somewhat less than normal

o   About normal

o   somewhat greater than normal

o   Much greater than normal

 

@   of the main or most important product in terms of sales.

*”normal” means the average level obtained during the corresponding time point of preceding 3 years, excluding the Covid-19 period.

 

B. Current Costs Per Unit^

Q3. Looking back, how do your current COSTS PER UNIT^ compare with this time last year?

o   Down (< -1%)

o   About unchanged (-1% to 1%)

o   Up somewhat (1.1% to 3%)

o   Up moderately (3.1% to 6%)

o   Up significantly (6.1% to 10%)

o   Up very significantly (> 10%)

o

^   of the main or most important product in terms of sales.

 

C. Forward Looking Costs Per Unit$

Q4. Projecting ahead, to the best of your ability, please assign a percent likelihood (probability) to the following changes to costs per unit$ over the next 12 months.

 

%
%
%
%
%
%

o   Unit costs down (less than -1%)

o   Unit costs about unchanged (-1% to 1%)

o   Unit costs up somewhat (1.1% to 3%)

o   Unit costs up moderately (3.1% to 6%)

o   Unit costs up significantly (6.1% to 10%)

o   Unit costs up very significantly (>10%)

 

$   of the main or most important product in terms of sales.

Values should add up to 100%.

 

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